On 25th October, Lord Kerslake spoke at the HSA’s first Autumn Lecture, on the theme Rationality, Uncertainty and Social Justice: Addressing the UK Housing Challenge. Lord Kerslake is Chair of Peabody, London’s King’s College Hospital NHS Foundation Trust, the Centre for Public Scrutiny (CfPS) and London Collective Investment Vehicle (London CIV). Having spent 8 years serving the London Borough of Hounslow and a further 11 years leading Sheffield Council, he is now president of the Local Government Association. A former Head of the Civil Service, he led the Department for Communities and Local Government from 2010 to 2015. Prior to this, he was the first Chief Executive of the Homes and Communities Agency. In early 2015, he took up his current position as crossbench life peer in the House of Lords. His words are reproduced here with his kind permission.
Good Afternoon. Can I first thank the Housing Studies Association for inviting me to give this lecture today. It is a particular pleasure to be giving the lecture in my home city of Sheffield where I have now lived for 20 years. Give it another 20 years and I may (just) qualify as a Sheffielder!
If you ask what issue is occupying the thinking time in Whitehall and Westminster at the moment, the answer is simple. It is Brexit. To a degree that would have been unimaginable even a couple of years ago, Brexit dominates the policy and political landscape. In the Lords, we are quite literally kicking our heels waiting for the major Brexit bills to reach us from the Commons. I call it ‘waiting for Brexit’.
The malign impact of this dominance is to suck the political oxygen out of almost every other issue. Big and growing concerns such as the pressure on our health and care services struggle to get the airtime that they deserve.
If there is one issue however that stands a chance of breaking through the smothering Brexit blanket it is Housing. I think this is for three main reasons.
Firstly, because there is a real issue of affordability and access that needs to be addressed. Secondly, because housing has come to symbolise the generational divide – between the asset rich baby boomers and the opportunity poor millennials. And thirdly, because the shared view across the main political parties is that the housing market has stopped working to meet the country’s needs and requires the government to intervene heavily if it is to deliver. It therefore provides a totemic example of the current political debate about free markets and the role of government. Let me go through each of these issues in turn.
First, affordability. I suspect that most of the people in this room will know the scale of the challenge here, but I think it bears repeating. In the last twenty years, house prices have boomed. The median house price paid for a home in England rose 259% compared to earnings, which rose by just 68%. In London, median prices are now 12 times median salaries. In the South East nearly 10 times. In the East and South West nearly 9 times.
Home Ownership has fallen, with the percentage of owners at a thirty year low of 63%, down from a peak of 71% in 2003. For the 25-34 year olds, the figures are even more stark, with 38% owning their own home, down from 57% just 10 years ago.
So far, so clear. Dig a little deeper though, and the story becomes more complex. After taking account of inflation, residential properties are selling for less than they did in 2007 in almost 60% of wards across England and Wales. 95% of wards in the Northeast have seen falls. 92% in Yorkshire and the Humber.
It is worth noting that even with these falls, affordability ratios in the North, at 5-6, are still above the typical mortgage availability of 4-4.5 times salary. Compare this to London however, where house prices are now some 50% above their pre crash levels.
We can see that the national averages conceal as much as they reveal and the housing story varies enormously across the country. There is not one housing market, there are many, driven to a large degree by the growing economic divide between London, the South East and the rest of the country. But in each area there are affordability issues to be addressed.
The fall in the number of people living in regulated social housing has, if anything, been even more dramatic. Back in the eighties, just under a third of all households lived in social housing, largely council housing. The combined effect of right to buy and a falling off of new Council build has nearly halved that proportion. Of these, roughly a half live in council housing and a half in housing association properties, the latter growing rapidly through stock transfers and development.
So for those on lower incomes, the story of access and affordability has been a different one, with eligibility for regulated social housing limited only to those with the highest levels of need.
The balancing off of these two changes has come in the rapid growth of the private rented sector. This has more than doubled in size since 2002 to 20% or 4.5 million households today. It is worth saying here that in terms of absolute numbers, homeownership has not fallen as much as this percentage change implies. There has also been a significant growth in the number of households as well. Nevertheless, there has been a huge shift into a largely unregulated tenure that, until relatively recently, has commanded very little attention from policy makers.
Affordability has again been a mixed story, with rents in London estimated to be almost double those elsewhere in the country. In London, social rents are about a third of market rents. In many parts of the country there is very little difference.
The point I want to make here is the incredible scale of change there has been in my adult life. Access to good housing for many has been diminished, costs have increased and security has been reduced.
This brings me neatly to the generational divide. As has been well documented, we face the almost unique prospect of current and future generations being less well of than their parents. This is true of earnings but is starkly true of assets.
The Resolution Foundation’s Intergenerational Commission found that all cohorts born since 1955 have fallen behind their predecessors at the same age in terms of wealth. Baby boomers (1946-1965) hold over half of the nation’s wealth, compared to just 2% for millennials (1981-1995). Pensions play a part in this incredible disparity but by far the biggest factor is housing.
Now for pretty much all of my time working in the Homes and Communities Agency and then as a senior civil servant, this growing generational divide seemed to have almost no political consequence. The conventional political wisdom was that whilst young people might well have views on a range of political issues, they were less actively involved in party politics and much less likely to vote. The focus of the discussion on policy was therefore dominated by its impact on older people. It is no accident for example, that pensioners were excluded from the impact of reductions in Council Tax benefit.
However the last election dramatically changed that story. The Labour Party demonstrated that it was possible to mobilise young people to decisive effect. All parties have now had to rethink their political strategies accordingly. And at the centre of this rethink is housing. It does not take a political genius to note that housing is the top priority for Londoners at the same time as Labour now has an astonishing 25 point lead in the opinion polls (Lab 55%, Con 35%).
I have spoken here about the generational divide but housing is also at the centre of a wider debate about inequality. This is symbolised by the debate that followed the terrible fire at Grenfell. An event that should never have happened but did. Whatever the outcome of the Inquiry, it brought into stark relief the divide between the haves and have nots in a very affluent part of London.
We now have a Green paper planned on the role of social housing. This is likely to look at how it is managed and how the voice of tenants is heard. This should be an opportunity to make the positive case for social housing and the need for continued investment in both existing and new stock. It should not though, become a stick to beat local authorities who have generally done their best in very difficult financial times.
Housing is also at the centre of the debate on welfare reform. It is housing benefit that is proving the most troubling of the six benefits going in to Universal Credit. The problems of rolling out of Universal Credit have been very prominent recently but they are not the only issue here. The freeze of Local Housing Allowances and the effect of the benefit cap are likely to have an even bigger impact. Shelter have calculated the combined effect could be to drive thousands more in to homelessness. So housing is front and centre in the debate about inequality and how it should be tackled
Let me turn now move to Market Failure.
I came in to housing in 2007 when I left the role of Chief Executive of Sheffield City Council and took up the post as Chief Executive designate of the soon to be formed Homes and Communities Agency. The Agency came in to being at pretty much exactly the point at which the housing market fell off a cliff. New housing supply more than halved and many of the biggest housebuilders very nearly went under. Indeed quite a few housing associations also got themselves into considerable difficulties.
The task then was to keep the housebuilding sector alive.
A major and high risk intervention was made by the then Labour Government involving a significant injection of cash. The scale of this risk was brought home to me a year or so after the crash when the CEO of one prominent housebuilder told me the good news that his share value was now worth 10 times what it had been its lowest point. The less good news was that it was still worth a tenth of its value pre the crash.
The interventions we made then were largely successful in keeping the larger housebuilders going. Much less so the smaller ones, who suffered a dramatic decline from which they have still not recovered.
Over the ten years since the credit crunch, housebuilders have largely restored their balance sheets and profitability. New supply has risen, increasing by 11% between 2014-15 and 2015-16 and has now reached 190,000 net additions, 164,000 of which are new build. Government have supported the sector enormously, putting some £16 billion in to Help to Buy Equity Loan up to 2020 as well as substantial funds in to schemes such as the Housing Infrastructure Fund. The planning system has been radically overhauled with the creation of National Planning Policy Framework, performance thresholds have applied to planning departments and a standard viability test introduced for planning gain. All of this has had an effect and according to a recent report from Savills, the government is on track to deliver its target of 1 million homes by 2020.
The honest truth however is that we have only just recovered to the rates of build delivered prior to the crash. We are still way below the estimated 250,000-275,000 homes a year required to meet demographic trends. So the housing numbers are up, housebuilders have returned to profitability but we are not delivering the homes the country needs.
The Housing White Paper last year recognised this when it spoke of a broken housing market. It also signalled an important policy shift away from the almost total reliance on build for sale in the Cameron/Osborne era towards a mixed market of delivery encompassing all types and tenures. By common consent though, the proposals contained in the White Paper lacked the firepower necessary to make a real impact on the numbers.
We are now ahead of the budget returning to the debate of what more is needed. Sajid Javid has raised his head above the parapet and promptly been shot down by the Chancellor. Whatever actions are taken to increase supply, we know that we cannot quickly build our way to affordability. As the research for the Redfern report established, the key determinants of current price are access to mortgages, interest rates and changes in real wages.
So to have any impact we will need to build a lot more houses for a very long time. And we need to think hard about not just how many, but where and what type. In particular, planning gain and the market alone will not deliver the number of social houses we need for those on low incomes.
What is clear to me from my years in government is that much of much of the thinking on housing supply and indeed housing generally is irredeemably short term. It needs to be seen as an essential part of the country’s infrastructure and planned accordingly. We need a plan that straddles market cycles and changes in government. Decisions on housing need also to be based on evidence.
It is no secret that whatever passions ministers in DCLG may have had in recent years, one of them hasn’t been research. One of the quiet heroes of DCLG is the Head of Research Stephen Aldridge, who has carried on valiantly championing the importance of research in the face of some quite significant challenges.
And yet the experience of the last 50 years should make policy makers very humble about having all the answers. There may be a common agreement that the housing market is broken, but there is much less agreement on how to fix it.
Which brings me to the importance of the Collaborative Centre for Housing Evidence that was launched last week. Ken will I am sure say a lot more about this. Suffice to say that I think it is one of the most important initiatives in evidence based policy making that I have seen in my career and will have a profound impact in housing policy for years to come. I am delighted to have been asked to chair the International Advisory Committee.
So to conclude. Housing is an endlessly fascinating subject that has rightly risen up the political agenda. Everyone has a view about it. Everyone is in some way affected by it. By common consent the housing market is not working. But we are much less clear about the solutions. We are much more likely to take the right steps if we base our decisions on research and evidence. The Housing Studies Association has no fear of being out of a job for many years to come!